- Are trade secrets patentable?
The media reported early last week that an ex-employee of Goldman Sachs had been arrested by the federal authorities for allegedly stealing the codes of the company's proprietary trading system. (See here & here.) According to the reports, US prosecutors told the court that the revelation of the secret codes would cost the company "millions upon millions of dollars". What is more, the prosecutors said that the stolen codes could be used to "manipulate markets in unfair ways". It also appeared that the ex-employee left GS in June this year to work for another company also engaging in the business of proprietary trading.
This piece of news did not raise too many eyebrows in the markets. GS's stock prices were virtually unchanged through the week. It does raise a few interesting related questions, though. For example, if the codes can indeed be used to unfairly manipulate markets when fallen in the wrong hands, did GS take advantage of that malign capacity while it had the secret possession? Also, did the ex-employee sign any non-compete agreement that should have prohibited him from working in a similar field?
I am not going to talk about these questions in this posting. Rather, I would like to focus on another question related to the intertwined paths of trade secret and patent. -- Now that the cat is out of the bag, can GS seek to patent the previously secret strategies to prevent others from using them? Or, more generally, even if the secret codes had not been stolen, can GS patent the strategies after profiting (supposedly) from them secretly for some time?
On a first look, there seems to be little reason for GS to pursue patents for the stolen strategies. Proprietary trading firms normally prefer to keep their strategies confidential, because if too many people trade the same strategy at the same time, any profit opportunities will quickly disappear. Even though theoretically a patent may allow the owner to stop others from using the strategies when they are no longer proprietary, figuring out who is/are using the strategies and enforcing the patents can be challenging. Moreover, it may take years to obtain a patent, when the strategies will most surely have outlived their usefulness.
There is, however, no guarantee that others will not obtain patents and seek to prevent GS from using the strategies. Also, it is not entirely impossible to find out whether the major players (maybe not all the players) are using the same strategies. Patents therefore may be effective and useful in preventing these major players from using the same strategies. In addition, even if the strategies have lost their values in proprietary trading, they may still have significant values in hedging, corporate financing, preventing "unfair market manipulations", non-proprietary trading for clients, risk management, and other uses.
Whether the secret strategies are patentable will depend generally on the normal criteria, principally whether the strategies are new and non-obvious. A more specifically related issue here is whether the past secret use of the strategies by GS would preclude the strategies from the patent grant.
This issue arises because the main goal of the patent grant is to encourage public disclosure of inventions. It would contradict this goal, if an inventor is permitted to keep an invention secret and profit from it for a long period of time, and then continue to be eligible for the patent monopoly when trade secret is no longer a desirable or viable strategy.
The patent law does not explicitly address this issue. The Patent Act requires an inventor to submit a patent application within one year only if the invention is "in public use". (Patent Act §102(b)) The courts, however, have broadly construed the term "public use" in this context to include most commercial activities, excluding only strictly confidential uses. For example, the courts have held that giving corset steels to a close friend to wear intimately without restrictions was public use (Egbert v. Lippmann, US Supreme Court, 1881); selling to the public a product manufactured by a secret method was public use for the secret method (Metallizing Engineering v. Kenyon Bearing, Second Circuit Court, 1946); limited market testing of a product manufactured by a secret method was public use for the secret method (Dippin' Dots v. Mosey, Federal Circuit Court, 2007).
Giving these previous cases, does the "secret" use of the strategies by GS in the public markets to profit for itself (and perhaps for its clients) constitute "public use"? (Assume that GS invented the strategies and has used the strategies for more than one year since the invention.)
I have not found any case that directly addresses this fact pattern. And, it can be argued that because GS used the strategies strictly in confidence, not giving up the strategies to the public domain, the uses were not "public use", even though GS did profit from them. The previous lines of cases, however, were not concerned about whether the public had learned about the invention. Rather, the core of the holdings was that the inventor had given up the patent rights by keeping the invention secret for too long.
Therefore, it is most likely that GS will not be able to obtain a US patent on the secret strategies. Other countries, however, may still allow trade secrets to be patentable.
